Epidemic modelling and actuarial applications for pandemic insurance: a case study of Victoria, Australia

Abstract

With the recent outbreak of COVID-19, evaluating the epidemic risk appears to be a pressing issue of global concern and one of the major challenges recently. In the fight against pandemics, the ability to understand, model, and forecast the transmission dynamics of infectious diseases plays a crucial role. This paper provides an overview of foundational compartment models and introduces the Susceptible-Exposed-Infected-Containing-3-Substates-Recovered-Dead model to study the dynamics of COVID-19. A meticulous data calibration procedure is employed to study the evolution trend of an actual pandemic using real-world data from Victoria, Australia. Additionally, the paper discusses innovative applications of epidemic models to the insurance industry, which are currently under investigation. Through the use of the newly developed analytically tractable model, insurance companies are able to determine fair premium levels during an outbreak. Moreover, the paper provides practical guidance for insurance companies by examining the variation in reserve levels over time.